7 Simple Steps to Eliminate Debt and Build Wealth
Thursday, July 29, 2015
For most of us, reducing debt is not as easy as creating a budget and sticking to it. Knowing what your finances are, sticking to your budget and being creative with money are the seven steps to successfully eliminating debt and building wealth.
Step 1: Know what the playing field looks like
When resolving your debt, making yourself aware all of details of your debt is essential in order to draft a successful debt reduction plan.
Set aside one evening. Shut off the television. Put on some relaxing music and take a deep breath. Now you will begin to move forward with your intention of paying off your debt.
Begin by opening all of your unopened bills. Now, stack them along with the opened bills and set them neatly to one side. Next, check your credit report. After you download your free copy, match up the most current bills to what is on your report. This is the time to make sure the amounts you owe are correct. Set aside any incorrect bills or charges that will need to be disputed. Now is the perfect time to write and send out any disputes.
Step 2: Create a budget
Chances are, you have never created a budget before. Often, people get into debt not by being extravagant, but by spending exactly what they make, so when a health issue or car emergency occurs, the old credit card is pulled out and soon, these expenditures tip the scales and suddenly debt is piled on over more debt.
Start simply by using a notebook or an Excel Spreadsheet. Write down your monthly bills and your monthly pay. Bills include your mortgage, heat, insurance, electricity, car and credit card payments. Do not include food or entertainment. Add up your totals. Now, subtract 10% of your take home pay. This is for your savings. From the remaining amount, you can budget food, gas and entertainment and extra credit card payments.
Now, set up payment reminders or auto pay and write up the paperwork to have that 10% taken from your paycheck and put into your checking account. By paying your payments on time, and beginning to save some money, this will improve your credit score and steadily move you closer to your goal of resolving your debt and building wealth. Pay extra money on your credit cards to reduce the total amount. Financial expert Clark Howard suggests laddering. Laddering is when you pay extra on the highest-interest card first, and after this is paid off, pay the second highest interest card.
Step 3: Find ways to reduce your debt
Some people may find that each month they are making less than they owe. This may be a more common situation, while others are looking for a little extra money to pay extra on their highest interest card. This is when you must look for ways to reduce debt. In the meanwhile, look at all of your bills and evaluate every single expense you have and determine if there are any places you could substitute a For example, are you paying cable TV and Internet. Could you save money on a Netflix account and delete cable altogether? Or can you perhaps watch your favorite TV shows from the Internet? What about your insurance? Can you increase, even temporarily, your deductible to decrease the cost of your insurance? Even try calling your mortgage and your credit card companies to negotiate a lower interest rate. While this does not seem like a big deal, in the long run, this can be a huge cost savings.
The easiest place to save money is on your grocery savings. Learning how to cook, eating at home, bringing your own coffee and packing a bag lunch for work is key to keeping your food costs down. You do not need to purchase cookbooks or magazines to find delicious and filling recipes that will keep your food budget down. Just look on the Internet and there are food blogs and celebrity chefs and home cooks that have posted recipes and videos that will teach you how to make some good food inexpensively. A favorite old book, The Complete Tightwad Gazette by Amy Dacyczyn will not only inspire you to save money on food, but also inspire you to question every single purchase you make and encourage you to save money. Your library or used bookstore will have this classic book.
While you are browsing your library, this is a great opportunity to find movies and books to keep you entertained. Staying home to watch movies or stream series or read the latest bestseller is an ideal way to keep your entertainment costs down. In addition, if you have a gym membership, regularly going to the gym is going to benefit you more than paying and not going, or even the time it takes to sell your membership to someone else. This is a healthy way to take care of yourself as you take care of your finances.
Step 4: Bad habits hiding in plain sight?
Spend a week or two writing down every penny you spend. Question everything you spend money on. Do you really need to use that many paper towels when you have dishcloths that can also do the trick. Consider your soda drinking habit or cut down on other vices such as cigarettes. Reducing these expenses can easily allow you to make an extra payment on that high interest credit card.
Step 5: Make extra money
Taking on a second job may seem like an obvious first choice, but sometimes, this will mean that you will go up a tax bracket and the extra salary just earns you pennies. Selling old unused items in a yard sale, Craigslist or eBay can help you earn a few extra dollars. Start by cleaning through your house. Odds are, you have a spare room, basement or a closet where items are haphazardly thrown in and the valuable items are piled on top of each other.
"Start off slowly and discard just one item a day." Marie Kondo, author of the excellent The Life-Changing Magic of Tidying Up: The Japanese Art of Decluttering and Organizing suggests. This is also a very holistic way of identifying why you are in debt and what you have purchased to get you into this difficult situation. Cleaning out these rooms along with focusing on your budget will keep you focused on your reducing your debt and spiritually move you into saving.
Step 6: Negotiate
Now that you have an attack plan, deal with the past and contact those companies that hold your bad debt. Negotiate with them and agree to a payoff amount. Pay that amount and check your credit report to ensure this information is correct.
Step 7: Invest
Have you signed up for your company's 401K or profit sharing? How about taking some classes on investing in the stock market or in real estate. Now that you are in control of your finances and your lifestyle, you can take some time to make that money work for you.
